On Feb. 23, the IRS released its first publication on the so-called “Cadillac” tax, a nondeductible 40 percent excise tax on high-cost health coverage that is scheduled to take effect in 2018.
IRS Notice 2015-16 (the “Notice”) describes possible approaches for defining the coverage that is counted, determining the cost of that coverage and applying the annual dollar limits.
In the Notice, the IRS requests comments on the proposed approaches and also indicates that it will issue a second notice that will also be open to public comment before issuing proposed regulations. So it will likely be some time before final regulations are published. In the meantime, political pressure is increasing, in an effort to have Congress repeal the tax.
Background on Tax
The new tax is a product of the Affordable Care Act (“ACA”), which added Internal Revenue Code Section 4980I. Under Code Section 4980I, beginning Jan. 1, 2018, employers will be subject to a non-deductible 40 percent excise tax on health coverage in excess of certain annual dollar limits.
These annual limits vary. For example, for active employees, the annual dollar limit for single coverage is $10,200 and for coverage other than single (e.g., employee plus one, employee plus children, family) (referred to herein as “self-plus coverage”) is $27,500. These amounts are also subject to some other variations (e.g., for high-risk professions and multiemployer plans).
What Coverage is Taxed?
Code Section 4980I applies the tax to “applicable coverage”, which is generally defined to include any group health plan coverage that an employer offers to its employees.
The Notice reiterates some things that the statute already told us – applicable coverage includes a broad array of coverage such as major medical coverage, health flexible spending accounts
(including employee salary reduction contributions), health savings accounts, on-site medical clinics, retiree medical and multiemployer plan medical.
The Notice also gives some insight on what might be excluded and included in applicable coverage beyond what we know from the statute:
- Employer contributions to health savings accounts (HSAs), including employee salary reduction contributions to HSAs, will be included.
- Employee contributions to HSAs outside of payroll or on an after-tax basis will not be included.
- Health reimbursement accounts (HRAs) will be included.
- Executive physical programs will be included.
- On-site medical clinics that provide only “de minimis” benefits will not be included.
- Limited scope insured dental and vision programs will not be included.
- Self-funded dental and vision programs that are otherwise “limited scope” may be excluded.
- EAPs that meet certain criteria may be excluded.
How Do We Determine the “Cost” of That Coverage?
So we know that the above coverage can be subject to the tax if its “cost” exceeds certain dollar thresholds. But how do we determine the “cost” of the coverage? The general rule is that the “cost” will use rules similar to those used in setting a COBRA premium. The problem, though, with that definition is that the IRS has never told employers how, exactly, to set a COBRA premium.
Recognizing this, the IRS describes some possible approaches to determine the “cost” of the “applicable coverage.” For example, an employer could use an actuary to help make the determination or use a “past cost” method. When further guidance is issued on this topic, employers will likely examine whether they have flexibility to pick a method that works best for them. If so, employers will likely select the method which results in the lowest (or no) tax under Code Section 4980I.
Will the Tax Survive Until 2018?
The tax under Code Section 4980I has been unpopular with both Democrats and Republicans. There is some political pressure from both businesses and unions to repeal the tax entirely. It is possible that the two parties could act in 2017, after the 2016 Presidential elections, to repeal the tax. Of course, it’s possible that the ACA could be modified in whole or in part before then, also.
Currently the guidance on this tax is not definitive enough for employers to take many actions. Running estimates to determine if the tax would apply is a good step, but employers must recognize
that there are some variables, which will not be known, likely for some time. If an employer is working with a unionized group where a collective bargaining agreement will be in place for several years,
the employer should take a closer look at this and perhaps reserve some flexibility on this issue.
Send the IRS Your Comments. Read Notice 2015-16. Comments are being accepted through May 15.
Contact information is listed on the last page of the notice.
Excise Tax Resources
- Excise tax calculator – This tool helps you project whether your company’s health plan may be subject to the ACA’s excise tax, also known as the “Cadillac tax.”
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